all right alrighty so in today's video I'm going to be talking about the top five deest wheel strategy mistakes that I see many people make right so I've been trading the wheel strategy for quite some time now and I even shared it in my own portfolio right what are the stocks that I've been willing and how I trade it so you can definitely just go to my channel and just look for you know the seven figure portfolio right so I share what's inside my portfolio so for the wheel strategy if been actually doing pretty well
for me and the reason is because I have been avoiding the mistakes that I'll be mentioning in this video so if you two want to do well in your whe strategy and definitely avoid getting into stocks where it can potentially go to zero then you definitely want to watch this video all right so let's Dive Right into this starting with the very first mistake and mistake number one and that is to just choose High volatility stocks and not profitable companies so in my opinion this is the biggest mistake that I see many many beginners make
right they just go for the very high volatility stocks because they think that it's going to give you a lot of Premium but the problem is that when you go for this High volatility stocks is actually increasing your risk so many people love to trade the wheel strategy on high volatility stocks because it gives High premiums now first of all nothing wrong with high volatility stocks if it is also a profitable company right so if you tie these two together that's fine right but if you're only focusing purely just for the very high volatility right
because you want to get a lot of premiums then this is where it can get into a lot of trouble a lot of problems later on as you trade it right if you're just focusing on getting as high as volatility as you can so as you can see this is AMC so AMC is a pretty popular stock right it's one of the M stocks amongst you know many people trading it especially those with small Capital because they can get quite a big premium right so one of the stocks the meme stocks is AMC you have
another one down here this is Neo as you can see look at the volatility down here over 100% for most of the option uh expiration dates right and then also gme right the ever popular gme as you can see over here the the volatility also pretty high but what many people don't realize is that the higher the volatility it indicates the higher the potential movement of the stock which also means that there is a higher risk right many people just think of high volatility as high premium but they don't really understand what does it actually
mean High volatility just means that the range of the stock the movement of the stock for that period will be quite big so this is the range of a given stock so if you compare a high volatility versus a low volatility right you will see that the range will differ from this so you get a higher premium only because the chances of the stock actually moving very big is higher which means to say let's say for example you get into the stock somewhere at this level down here right let's say for example you're selling a
cash secure put somewhere where here now in the event there's going to be a very big move this stock which you chosen with the high volatility can move so much more below your cash secure put compared to the one with low volatility because it's going to only move a smaller range so with a smaller range your loss won't be as big compared to a high volatility now of course if the market shoot all the way up then if you sell a cash C putut then of course it's going to be in a profit but we
must always take into account the risk as well right you don't just want to see how much you want to make and then you ignore all the risk involved with this so this is the problem with high volatility stocks and one of the other major problems is that many of this High volatility stocks is that they are unprofitable companies right so remember whenever we're choosing any stock it's not just like a name or a ticker down there that we're just trading as a game no because whatever that you're trading every stock is a company right
so either the company is profitable or not profitable many of these high volatility stocks are not profitable for example AMC right so you can very easily go to Google Finance and just take a look at their income statement as you can see over here this is AMC for the past 5 years they have not been profitable right as you can see the uh orange or rather the yellowish bar this is the net income and for all the past 5 years it is under zero so this company has not been making money for the past 5
years now you might be saying oh Davis but the uh net income is gradually getting better right the losses getting smaller and smaller yes that may be true but at the moment it's still a losing money company right the company is still not profitable so you want to wait till at least it turns profitable then you can decide okay maybe this might be a possible candidate for the wheel strategy but at the moment it's still a losing money company it's it's not profitable I would suggest not to go with AMC now what about Neo so
whenever I look at a company's income statement generally what I like to look at is increasing revenue and increasing profits right increasing net income but Neo is a very classic case of Divergence where you have increasing Revenue but you have increasing loss as well as you can see the more they sell their cars right the more cars they sell the more Revenue they make they actually losing even more money right as you can see over here this last bit down here they make the most Revenue out of the past 5 years but it's also the
biggest loss for the past 5 years so if you ask me for my opinion maybe they should just stop selling their cars because if they do probably you know this will at least be not so bad so as you can see new very high volage right you seen earlier about 100 plus% but it's not a profitable company now what about gme gme same thing as well right as you can see for the past 5 years not really profitable except for 2024 maybe it's potentially going to be in a slight profit but the year has not
closed out yet so we don't really know but again as you can see the uh revenue is a little bit inconsistent right down up down so again there are better candidates for or the wheel strategy these three are not the ones that I will look for when I trade the wheel strategy so when the stock is not a profitable company it increases the uncertainty and risk of the stock and it's actually reflected in the share price movement so let me repeat that because this is very important when the stock is not a profitable company it
increases the uncertainty and risk of the stock and it's reflected in the share price movement so as you can see over here this is AMC right you can see the AMC is an unprofitable company and look at the share price right it's so erratic maybe if you got in to the stock maybe sometime in 2020 right during the pandemic and then you held on all the way until the big move up at 2021 then you quickly sell it off maybe you're in a profit but for the most part you can see this is a very
difficult to trade the wheel strategy stock right because if you were to get into the wheel strategy right now man you have no idea when you're going to get out of the stock so as you can see I'm profitable company reflects in the chart now what about Neil same thing as well right it's not a profitable company and towards the end as you can see the price is pretty much doing not much right going nowhere and finally gme gme same thing as well again all these are meme stocks right sometimes back in 2021 there's this
very big spike so if you got in then and then uh you made that profit good for you but it's not one of those stocks that I will continue to wield over and over again so for me I prefer staple stocks when I do the wheel strategy so I can do it over and over again knowing that in the long term at least there's a greater chance of it appreciating than it going sideways or going all the way down and being bankrupt right so as you can see this is gme stock and it's pretty much
doing nothing right just going sideways and if you ask me this looks more like an electrocardiogram reading right as you can see over here this is the uh reading when you know they they test your heartbeat right so if you were to trade gme then I would guess most of the time whenever you get into the stock and the stock is going down then this is where you have your heart attack right your heart is going to beat much faster than before so this is not a stock chart this is an electroc cardiogram reading chart
all right now what if the stock is profitable when the stock is a profitable company it now decreases the uncertainty and risk of the stock and is also reflected in the share price right so an example Google right as you can see Google doing pretty good increasing Revenue net income pretty stable as well and take a look at the share price right over the long term it has been appreciating now if the company is profitable of course there are no guarantees that it will always go up in the long term at least the chances of
it going bankrupt is not so high right because it's a profitable company and also there is a higher chance a higher probability that the company can go up in the long term especially if the earnings are good they're always making money this will reflect in their share price now another company Amazon right as you can see Amazon increasing Revenue increasing uh net income except for 2022 so 2022 was an anomaly because they invested in an electric automaker uh Rion and that kind of suffered during 2022 the share price got plunged quite a bit so uh
only that one year but after that as you can see 2023 is in profit again so Amazon is one of those companies that I think is also pretty decent for the wheel strategy and again as you can see reflected in the share price so if you want to avoid the problem whereby you get into a stock and then once you're assigned you you fear right because you're not sure what's going to happen is the market going to continue to go all the way down or is it going to go back up right so if you
want to reduce that risk of that happening when you get into the wheel strategy stocks then definitely go for the profitable companies now mistake number two now mistake number two is choosing overvalued stocks so at this point you might be saying hey Davis I went for you know your suggestion to go for profitable companies but after I got into it the stock price still plunged down for quite some time and one of the reasons for that is that it could be overvalued right so you could have chosen the right stock but it is at the
wrong price right so if it's overvalued then chances are that the stock can still go down so what I notice is that over time stocks will tend to grad usually gravitate to their mean value but of course right valuation of a stock can tend to be subjective right depending on how you calculate it and who you ask regarding the valuation right and what kind of data you use however there's still going to be a general consensus as to how a valuation of a stock is arrived and with this valuation at the very least it gives
us a rough estimate of where the stock price can go to right so if we at least have a number evaluation then we can base on that see whether it's overvalue and it's undervalue so you could choose a good company to do a real strategy on but if it's overvalued it still could go down so to air on the safe s side to have a margin of safety we want to choose profitable companies that are currently under value right so the next question you might ask is so how do I know what a company's valuation
is so this a good question and there are actually already many sites that give you the valuation of the stock right they give you the valuation for example the simply Wall Street so this side is taken from Simply Wall Street as you can see over here they give you their valuation right this is of Amazon Amazon you can see the fair value is 336 according to them current price 186 is undervalue so at least based on this Fair values I know that there's still some room to the upside right compared to imagine if you go
to a stock where the fair value maybe the fair value is about $100 current price 186 then the chances of it going up or at least the upside uh room it can go up is not as high right now there are other sites as well for example Guru Focus Morning Star so what if all the different sites give you different valuations then you can just take an aggregate of it right so what I do is I like to go to a few of the sites take a look at the value and then I will give
a discounted value as well right so I'll try and find the lowest one so let's say for example 336 is the lowest one then I might even discounted even further so maybe discount by 10 20% and if it's still above the current price then you know that the current price is under value so in this case again it give you a margin of safety so even if you get into the stock at least you know there's still some room to go on the upside by the way if you like this video so far Please Subscribe
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which is a little bit weird in my opinion because the whole idea of the wheel strategy is to sell the cash secure put to get assigned and then sell the cover call so if you're always trying to avoid assignment then you're not really trading the wheel strategy right you might as well just trade the short putut by itself right just trade the short putut and then not get into stock positions right that also means that you have to take loss when it's time to take loss but if you want to trade the wheel strategy then
know that getting assigned is just part of the strategy so there are two common things that people do to avoid assignment so the very first one they do is they sell a cash secure put with very low Delta so maybe the price right now is somewhere around here right around 148 and they might sell one that's super far away so maybe they go for something like 20 Delta or maybe even 10 Delta now if you are trading the short putut that means you do not plan to get a sign then 20 Delta 30 Delta I
think that's fine because you're just trading the option by itself but if you're trading the wheel strategy with the whole idea of actually getting ass signed then 10 to 20 Delta is not really going to help you with that uh there's two problems with this so problem number one is when you choose a low Delta for your cash SEC output the return is also going to be low because remember now there's a difference between the short put also known as The Naked put compared to the cash output with the cash secut you already have set
aside your Capital that you don't mind getting assigned on the stock so your capital outlay is much higher so if you're going to choose a Delta that's so low then your return is going to be very little now if you trade the short put by itself that means the nak put you're trading based on you know whatever the buying power is so of course the return is going to be higher so you need to be very clear what is the strategy you're planning to trade so if you're planning to trade the wheel strategy you are
going to commit the capital at least choose a slightly higher Delta 10 to 20 Delta is just way too far away and the second problem with this is that if your cash secure put actually expire worthless it's likely because the stock has shut up so at this point a lot of people get excited you know they say oh wow I sold the cash out putut and then expired worthless I can sell the cash out putut again wow the wheel strategy is so good but the problem is that the market most likely went up and if
you actually had gotten assigned right let's say for example you saw the cash output somewhere here and then you got yourself assigned now you're in a share position now the stock goes up you're going to participate on the upside in terms of your capital gains this is a big portion of the wheel strategy so had you gotten assigned you would have participated in the up move but because you wanted to you know avoid assignment you saw one C put that is so far away guess what all you did is get that very little premium and
then you watch the stock fly to the moon and you're not on that boat now the second way that people avoid assignment is to keep rolling out and down so rolling out and down is fine but there's a certain point where you want to actually stop rolling up and down so if you do it once just to get a lower assignment price that means to get your long shares at a slightly uh lower price that's fine but if you keep rolling out and down for the whole idea of avoiding assignment then guess what again it
defeats the purpose so for example let's say the market came down a little bit they touched the cash cut put what people will do is that they will roll out and down so right now they push to a lower strike price but they also push out to a further date so when you push out to a further date what happens is that it takes a longer time for this option to expire and by the time the market could have gone past and then gone back up and then you wouldn't have gotten a sign again same
thing you would have just gotten the premium you miss on the upside move so what happens is that when the market comes down again it touch the cash output they're just going to keep rolling down and rolling down again so again this is the same problem if your cash secure put expire worthless it's likely because the stock has shut up had you gotten a sign you would have participated in the up move so remember when you're training the wheel strategy the whole idea here is to get assigned because once you get assigned then this is
where you can actually get the capital gains and capital gains I can tell you plays a big part in the wheel strategy and if you choose the stock right in the first part avoiding mistake number one then you're actually going to have quite a bit of profits in terms of the capital gains now mistake number four is ignoring potential capital gains so talking about capital gains just now this is the next mistake right so many people trade the wheel strategy only wanting to just make the premiums and forgo the capital gains for example you see
that this is the price where you want to get assigned you don't mind getting assigned so you have to cash the putut so now the market has gone below your cash secure putut and let's say at this point the cash secure putut expires now you assigned 100 shares so so far so good but the problem now is that many people right now start to sell the cover car exactly at where they were assigned right so what this means is that you have removed any chances of getting capital gains right because once the market shoots back
up and then it expires your shares get C away guess what you only get the prems for selling the cash SEC putut and the covered call and you miss this whole gain upward so again no capital gains down there so what you want to do instead is wait until the price actually goes up right and then two ways you can do it either wait until the stochastics oscillator is overbought then you start to sell the cover call or wait until it reaches its value right the valuation like I mentioned in mistake number two so this
way at least you can secure some capital gains which again can play a very big part in your profits in terms of the wheel strategy so like I mentioned not many people realize that capital gains is actually the biggest potential profit portion of the wheel strategy and if you didn't make mistake number one and did your due delions on choosing the right stock in the first place then you actually don't have to worry about the stock not coming back up so one of the reasons why a lot of people want to sell the cover call
at the price which they were assigned was because they fear that the stock is never going to go back up right they fear that the stock is just going to continue to go down or maybe come back UPS sideways and then they're going to sell the cover call right but if again you chose the right stock then in the long term the stock will go up and then this is where capital gains can really come in to help increase your returns now the final mistake mistake number five and this is the one that I also
get quite a lot of questions on is selling your cover call below your entry price so many people sell their cover call below entry price hoping to further reduce their cost right so let's say for example this is where you got assigned the 100 shares and then the market starts to go down from where your entry price is in terms of where you assign the 100 shares so a lot of people panic down here so the want to quickly try and reduce the cost of this uh shares by keep on selling this covered call and
this is what they do right so they sell the cover call below their entry price now all this is good if it continues to trade down here and you know your cover call never really gets tested and over time this really helps to reduce your uh cost of this 100 shares which you got assign down here however one of the big risk is what if the market just suddenly starts to shoot up which can happen and if the market starts to shoot up the problem is that they can't really roll the cover car anymore many
people think that they can just keep rolling the cover call up and out once the stock goes up to their cover call but you will find if it hits too quickly and the move is too fast then it's very hard for you to roll up and out your cover call and when they can't do that now what happened is that you're stuck with a cover call that is below your entry price and finally when the cover call gets assigned guess what your shares get CAU away at a price lower than where you entered which means
to say this uh gap down here is your loss because what you have essentially done is that you have bought at this price and you sold at this price giving you a capital loss so don't even talk about getting capital gains right now you even have Capital loss so it's very important to be patient when you're Trading wheel strategy and not always feel the urge thinking that you must be selling something all the time it's not necessarily true you can just hold on to the stock wait until it finally goes back up and then you
start to sell the cover call so again all this comes down to choosing the right stock so if you had already chosen the right stock at the start especially if the stock is profitable and you've seen that over the past 10 years maybe even 20 years the stock has always been going up even after market crashes then you have lesser reason for you to worry right you only worry if you start to choose those stocks where it's not profitable and it's very high volatility and you just enter it because you hear that the premiums are
so high so what do you do if the stock is now below the entry price and then you cannot really sell the cover call at or above the entry price well you have two options the very first option number one is simply do nothing if you have chosen the right stock in the first place and believe in the fundamentals of the company just wait for it to go go up before selling the covered call so again like I mentioned all this all ties back to choosing the right stock the whole success of wheel strategy really
just comes down to choosing the right stock now if option one doesn't work for you then you need to go for option two which is to close the position for a loss when do you do this when you are no longer confident in the stock and you don't believe in the company's fundamentals then there is absolutely no point holding on to the stock and hoping it goes up because if you don't truly believe in a stock you don't think that you know in the long term it's going to go up to its valuation then get
out of it right because no point for you to hope and pray and then you get into more heartache sleepless nights for no reason that is why again as you can see many times I've emphasized in this video choosing the right stock for the wheel strategy is the biggest the primary factor to determine if you will be profitable so here's an example of Google so Google as you know is one of the stocks that I will and it has done very well for me and as you can see back in 2022 the whole stock market
pretty much went down Google was no exception as well as you can see it went down now during this time a lot of people just get fearful and they exit their positions thinking that oh it's going to be a market crash and this time it will be different there's always this little voice that appears in your head that tells you that oh no maybe this time is different only when the stock recovers then you realize oh it's the the same as the past few crashes so the market went down in 2022 a lot of people
panic they quickly sell off the stock for a loss only to regret it later on because the market eventually uh recovered and during this time I've actually been reing the stock as it came down I have a video on it doing the Wheeling on Google and also on Amazon and same thing as well for meta right meta was another of the company where I did the wheel strategy as well I did some lips on it as well so again 2022 Mana really went down right as you can see this is pretty much a crash from
$400 there about it dropped all the way to about I think about $100 or maybe under $1100 that's a very big move down now during this time a lot of people pnic as well they sell away their stock but I didn't do that I continue to do it because again I have the firm belief especially in the fundamentals right the company is profitable is doing well chances of it going to bankrupt is not as high as like AMC GameStop and even Neo so as you can see in the end it recovered and that's where again
the wheel strategy going to help you uh get the profits from the capital gains by the way I just realized that I put the number wrong it should be number five so uh just ignore this so let us go to the recap so mistake number one choosing High volatility stocks and not profitable companies so if you want to at least have a smoother Journey when you're training the wheel strategy and not have stressful and sleepless nights then choose companies that are at least profitable right don't go for the ones that high volatility only mistake number
two choosing overvalued stocks so air on the safe side just go for the stocks that are currently undervalued then you can start planning out your wheel strategy and if you want to find out what the valuation of stocks is just simply go to any of the sites which I mentioned earlier mistake number three avoiding assignment remember again capital gains is one of the uh big part the potential profits of the wheel strategy so the whole idea is to get assigned so definitely you do not want to avoid assignment once it's below your cash secur put
let it get assigned and then write the stock on the way up before you sell the cover call mistake number four ignoring potential capital gains like I mentioned earlier just now and finally mistake number five and that is to sell cover call below your entry price so if you do this you run the risk of the market suddenly shooting up past your cover call and now you're stuck with a cover call that is well below your entry price and when it gets called away you're going to be called away for a loss so do yourself
a favor avoid this five mistakes and you will see that your wheel strategy will start to do better and you have much much better sleep at night by the way if you like this video then you absolutely going to love this next video which I have for you so go ahead and watch that video right now also if you haven't already gotten your free copy of the options income blueprint you can do so just by clicking this link down here on your screen and you'll be able to get it for free free all right I
will see you in the next video
